Detroit/Washington: Chrysler LLC filed for bankruptcy on Thursday and announced an industry-changing deal with Fiat, after being pummeled by sliding auto sales and unable to reach agreement on restructuring its debt.

Despite weeks of intense negotiations, Chrysler failed to gain full support from its lenders to avoid the first-ever bankruptcy filing by a major US automaker. The move was hailed by President Barack Obama as a critical step in saving 30,000 jobs at Chrysler, majority-owned by Cerberus Capital Group, and hundreds of thousands more jobs at affiliated suppliers and dealers.

At the same time, Chrysler entered an expected alliance with Fiat SpA, in which the Italian carmaker was given an initial stake of 20 percent. The deal will allow Fiat to own up to 35 percent as it makes investments in US operations and small-car technology for Chrysler.

Over time, Fiat could eventually own 51 percent after Chrysler has repaid its loans to the US Treasury. Chrysler has struggled in recent years to compete, hurt by its near total reliance on the US market, poor quality and a truck and SUV-dominated vehicle line-up with the lowest combined fuel economy of any major automaker.

Founded in 1925 by Walter P Chrysler, three years later the company laid the cornerstone for the Chrysler Building, briefly the world’s tallest building and still a landmark on the Manhattan skyline.

The Chapter 11 filing, in US Bankruptcy Court in Manhattan, has implications for the entire industry–including Chrysler’s rivals and suppliers. As part of the filing, the US government will provide up to $3.5 billion in debtor-in-possession (DIP) financing and up to $4.5 billion in exit financing.

Obama said he hopes the entire process will take only 30 to 60 days. Some of Chrysler’s 3,600 US dealers are expected to close, and Chrysler Financial will stop providing loans for new cars and trucks. Instead, General Motors Corp’s financing arm, GMAC, will provide loans to Chrysler dealers and customers. The legal proceedings will be overseen by Judge Arthur Gonzalez, the same jurist who oversaw the Enron and WorldCom bankruptcies.

In addition to Fiat’s ownership stake, U.S. officials expect Chrysler to be 55 percent owned by the United Auto Workers’ healthcare trust fund while the U.S. and Canadian governments hold a combined stake of 10 percent.

Chrysler has three manufacturing plants in Canada and had to reach agreements with its unions there and the Canadian government under the restructuring. The automaker is not filing for bankruptcy in Canada, but the Canadian government, along with the province of Ontario, said they will provide $2.42 billion in financing to help the company restructure.

Fighting words

The bankruptcy signals that Obama is prepared to play hardball with holdout lenders rather than knuckle under to their demands and will likely set the tone for similar discussions with bondholders of General Motors–which is now on the clock to restructure its operations by the end of May.

While Obama voiced his support for Chrysler and the deal with Fiat, he was pointed in his criticism of the investors who did not agree to this deal. “I don’t stand with them. I stand with Chrysler’s employees and their families and communities,” the president said. “I don’t stand with those who held out when everybody else is making sacrifices. That’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations.”